What Is A Merchant Reserve?

By definition, a reserve is an amount of something set aside to meet some expected or unexpected future need for it. In the credit card processing industry, that unexpected need comes in the form of chargebacks, returns, and processing fees that become the responsibility of the credit card processor if a merchant does not have the cash flow to pay them.

In simple terms, you may be required to maintain a cash reserve that functions as an escrow account to protect your processor from the possibility of future losses. A set amount, or a percentage of each month’s credit card proceeds, are held or flagged by your processor until a certain amount is accumulated. This amount, and the length of time you may be required to keep this amount in escrow varies based on a risk assessment of your company. This is usually determined when you first apply for a merchant account, though changes in your business after your merchant account has been approved could result in the need to establish a cash reserve.

There Are Three Types of Reserve Accounts.

1. 1. Up-front reserve.
   Often new merchants with no earnings history will be required to pay a set amount of money as an up-front fee to begin processing. This sum may be collected by holding back that amount from your sales transactions, but it’s often collected when you sign your merchant account contract and held in an escrow account.
2. 2. Accrual reserve.
   A set amount is accrued out of your sales transactions to satisfy the reserve requested by your merchant account provider. For example: a $10,000 reserve will be accrued at 10% until the total amount is collected.
3. 3. Rolling Reserve.
   The rolling reserve is the most common of the reserve accounts. With a rolling account, your processor will keep a certain percentage of your monthly sales transactions for a pre-determined period of time.

For example, let’s look at a 10%/6 month rolling reserve. Ten percent of each month’s processing payouts will be held in a reserve account for 6 months. On the seventh month, your processor will release the amount held from your first month’s sales transactions. In the eighth month, they will release the second month’s reserve, and so on. This rolling reserve insures that the processor will always have a reserve to draw from in the event you do not have enough income to cover your processing fees on any given month.

Why Do Credit Card Processing Providers Ask For A Merchant Reserve?

The whole credit card industry is actually based on borrowing and loaning money. By signing that charge slip, your customer is only agreeing to pay for that transaction. No cash has exchanged hands yet, has it? Let’s follow the money trail of a credit card transaction:

But not all credit card transactions are so tidy. When a customer isn’t happy with your product or service and requests a refund, the issuing bank requests that money back from your processor, and your processor takes that amount from your merchant account. But what if there’s no money left in that merchant account?

Say you run a small landscaping business and your customer pays for a big job by credit card. Once the transaction processes and the money is in your account, you pay your guys and your monthly bills, and move on to the next job. But your customer’s newly sodded lawn turns all brown and dies, and he wants his money back. Now what? You’ve spent the money, you won’t have much money in your account again until after you get paid for your next job, and your credit card processing company wants the money back so they can pay the issuing bank who is demanding the money from them. That’s where a merchant reserve comes into the picture.

Who Is Required To Maintain A Cash Reserve?

So, a reserve account protects the processor if a company goes out of business or doesn’t have the funds to cover refunds and other processing company fees that come up later. Reserve accounts are usually imposed on high-risk merchants like:

This money still belongs to the merchant and is often released within 6 to 12 months. It’s simply set aside for this period of time as a safety net for the processing company.

Now that you have a clear picture of the lifespan of a credit card transaction, it’s easier to understand why your credit card processing company might ask to hold some capital in reserve. On your part, you need to review your monthly operating figures and determine if you can run your business without that cash flow. If not, you may need to look into other payment methods until your company is stable enough to qualify for a merchant account with no restrictions.